The implementation of smart manufacturing, manufacturing execution systems and Industry 4.0 projects all require compelling business cases that effectively communicate the value of their investment, especially as projects move out of the pilot phase and into rollouts at scale.
Because the creation of a compelling and achievable business case may fall on the shoulders of manufacturers, technology vendors, systems integrators, industry experts and consultants, it is important for everyone involved to be well versed in the language of business planning and common financial metrics.
MESA International (www.mesa.org) provides fantastic resources for those looking to learn more about the ROI (return on investment) and justification for smart manufacturing, including an online course and the “MESA Metrics Guidebook: ROI and Justification for MES.” These tools provide insights around what goes into a business case, the key metrics financial teams use to evaluate and compare opportunities, and how to directly apply those learnings to smart manufacturing initiatives. Following are some of the key takeaways from these resources.
Identifying Benefits
Stating potential benefits from smart manufacturing projects is easy but quantifying them can be hard. What is the value of putting accurate, real-time information in the hands of people who can use that information to drive change? It is often beneficial to think of smart manufacturing benefits across the following categories:
- Increased revenues, like a throughput increase or faster new product introduction.
- Reduced costs, like labor reduction or material cost reduction.
- Reduced risk, like replacing legacy systems or avoiding recalls.
- Qualitative (non-quantified) benefits, like operator retention or faster decision making.
Identifying Costs
Understanding all the costs required to realize the benefits of a smart manufacturing investment may require input from multiple stakeholders. Businesses want to understand the total cost of ownership (TCO) that addresses both the up-front costs for implementation and the ongoing costs of support and adoption. Fortunately, these costs are usually easier to quantify than benefits. Cost components to consider include:
- Hardware—servers (on-prem or cloud-based), networking and workstations.
- Software—application licenses and supporting software infrastructure.
- Internal—converting legacy systems into new applications and logistics changes.
- Services and Consulting—software implementation and requirements gathering.
- Risk Management—accommodating for increased production losses or process validation needs.
Return on investment and other financial metrics
ROI is an efficiency measurement of an investment and divides the expected benefit of an investment by its cost—usually expressed as a ratio. ROI is a popular metric because it is easy to calculate and use to compare projects, but it does not address important details like the timing of gains and costs.
Payback period is another easy-to-calculate metric and does factor in time. It specifically measures the time it will take to recover from the cost of an investment and is calculated by dividing the total costs by the benefits per-month (a $100 investment with benefits of $10 each month has a payback period of 10 months).
Net present value (NPV) is a more complex calculation commonly used for large capital projects. It takes the present value (the value of future sums of money in today’s dollars, accounting for the time-value of money) and incorporates the business’s required rate of return (weighted average cost of capital [WACC]) to evaluate whether a project increases the value of the company.
Not only do business leaders need to understand these terms (and more) and what they mean, they need to understand their firm’s expectations and decision-making criteria around them. For example, a project may have a positive NPV which indicates a solid investment, but the firm may only be considering projects that have a payback period of 18 months or less due to other strategic needs.
Worth the effort
Business case creation and financial justification can be a significant effort, but they’re necessary to get smart manufacturing projects approved. Make sure you are consulting with a wide variety of stakeholders across the organization, especially finance teams that are usually the key decision makers.
Remember to keep stakeholder teams together beyond the initial business case and justification because, as projects go live, there are sure to be changes that will affect your financial analysis. Plan to update your plan and keep those stakeholder relationships fresh to help with the revision process.
Visit MESA.org for more insights on smart manufacturing and how to calculate the ROI of smart manufacturing projects.
Sam Russem is the director of Smart Manufacturing Solutions at Grantek Systems Integration and a MESA member senior director.
